Siegel was unimpressed by the quality of people working with him. He knew Jeffrey Beck, one of Drexel’s rising young stars who had worked with him on the Beatrice deal, and asked Black whether he should be brought into the M&A department. Black shrugged. “He’s a congenital liar, but he can get you a meeting with anybody in the food industry.” Siegel was appalled that a “liar” would be kept on the staff, and refused to hire him for M&A.
Siegel also held Levine’s skills in low regard. At a Union Carbide meeting at the law offices of Paul, Weiss, Rifkind, Wharton & Garrison, Levine launched into a discourse on the subject of stock proration. It was obvious he had no idea what he was talking about, and Siegel saw Black and Ackerman, attending the meeting from Beverly Hills, roll their eyes in contempt. “He’s no rocket scientist,” Black said later, which Siegel deemed an understatement.
Siegel was also surprised by Levine’s seemingly casual approach to his work. Levine was frequently absent or missing during the middle of the day, and often left early. One day Levine asked Siegel to “cover” for him for several days. “I’ve got to go scuba diving in the Bahamas,” Levine said.
Given the talent vacuum, Siegel realized he’d be playing a bigger role in the department than he’d anticipated. He kept in close touch with many of his former Kidder, Peabody clients, anxious to see whether Drexel’s notorious reputation would deter them from using his new firm. Much to his relief, most seemed eager to use Drexel’s financing capabilities. Pan American, Strawbridge & Clothier, Carson Pirie Scott, Lear Siegler, Goodyear, Holiday Inn were some of the blue-chip companies that followed Siegel into Drexel’s orbit. Their establishment aura lent Drexel a cachet it could never have obtained without Siegel. Siegel found himself working harder than ever, often putting in 20-hour days.
Joseph was delighted. His plan to meld Drexel’s financing might with Siegel’s expertise was working out more quickly than he had dared hope. Kay and Black, too, showed little concern that they were being upstaged by the charismatic Siegel. But Levine complained bitterly about Siegel’s arrival. Levine was furious that he wasn’t also made a co-head of M&A.
He even went so far as to meet with Boesky about the possibility of replacing Conway as head of merchant banking in the Boesky organization. At a lunch with Ilan Reich at the Water Club, Levine boasted that Boesky had offered him a $5 million signing bonus. He said Boesky told him he needed someone “tougher” than Conway, someone like himself.
The truth was somewhat more complicated. Actually, $5 million was the sum Levine claimed Boesky owed him as his share of the insider-trading profits Boesky had generated using Levine’s tips. Boesky had countered with an offer of $2.4 million, which he conceded was owed Levine under the arrangement. If Levine were hired, the “bonus” would be a disguised method for making the payment. But the talks fizzled; Levine was far more valuable to Boesky as a source from within Drexel. So the talks continued periodically, with no resolution.
Despite Levine’s continued lavish spending—more fine art, a house in the Hamptons—his insider-trading profits were tapering off. He made a modest amount trading on MidCon, a Drexel deal, but then his trading stopped. He had made total profits of well over $10 million, the goal he had once set for himself, and the ring was disintegrating, with Wilkis at Hutton and Cecola gone. Increasingly, Levine looked to the Boesky arrangement as the source of future profits. In February, Reich had Levine and his wife over to their Upper West Side brownstone, where he’d just completed a new kitchen. Reich’s marriage had been rejuvenated, and he was thriving as a young partner at Wachtell. Even Levine was impressed. When he and Reich were alone, Levine told him, “You made the right decision” in pulling out of the scheme. Levine said his own career at Drexel was thriving, too. “It’s almost enough to make an honest man of me.” He laughed.
One day Siegel overheard Levine discussing confidential details of a Warnaco deal that Goldman, Sachs was working on, and he called Freeman. “You’ve got somebody over there in a ring with Dennis Levine,” Siegel said. “I think I know who it is,” Freeman replied, but didn’t elaborate. Freeman reciprocated by warning Siegel that someone at Drexel was leaking details of a Drexel-backed MidCon merger. Siegel called Joseph, saying, “You’ve got a real problem on your hands.”
Since moving to Drexel, Siegel had remained in close contact with Freeman, who continued to give him details of Goldman deals. Since Siegel was no longer responsible for arbitrage, however, he didn’t trade on any of it. Moreover, true to the vow he had made when he left Kidder, Peabody, he stopped giving Freeman confidential information. When Freeman pressed him for details about Graphic Scanning, a Drexel deal in which Freeman had a large stake, Siegel insisted, falsely, that he didn’t know, and referred Freeman to Kay.
The past seemed truly buried, except for one jarring note. One afternoon Levine sauntered into Siegel’s office and, after shooting the breeze a few minutes, casually asked, “Where do you get your inside information? Boesky?”
Siegel froze. Would he always be haunted by his past? He tried to be equally casual. “I stopped dealing with Boesky years ago.”
In April 1986, a ripple of anticipation washed over the more than 2,000 participants crammed into the main ballroom of the Beverly Hilton as curtains drew back for a screening of one of Drexel’s “commercials,” now a popular fixture of the Predators’ Ball. As the strains of the “Dallas” theme song filled the room, Larry Hagman strode onto the screen, flashing a “Drexel Express titanium card.” The card has “a ten-billion-dollar line of credit,” J. R. drawled. “Don’t go hunting without it.”
Then came a spoof of the popular Madonna video, “Material Girl.” A voice like Madonna’s lip-synched “I’m a Double-B girl living in a material world,” a double entendre referring to low-grade bond ratings and bra size. Madonna danced on the video screen and the chorus sang “Drexel, Drexel.” The crowd roared with delight. When the spotlight fell on the conference’s surprise entertainer, it was Dolly Parton.
Drexel, proud of its own new star, wanted Siegel front and center throughout the affair, but Siegel demurred. He’d only been at the firm a month and a half, and he didn’t want to upstage veteran Drexel officials. Siegel declined the opportunity to host the M&A department breakfast, leaving that role to Levine, who boasted of Drexel’s growing strategic prowess. But Joseph did persuade him to moderate a panel featuring takeover lawyer Flom and other lawyers discussing legal developments in the takeover field.
“You know me as a staunch defender of targets,” Siegel began, reaching under the table and donning a white cowboy hat, symbolizing the blue-chip Kidder, Peabody. “Just because I’ve come to Drexel doesn’t mean I’ve changed my views,” he said with a twinkle in his eye as he reached under the table again and substituted a black hat for the white one.
Everyone laughed, even Siegel’s establishment clients. Several of them, including the chairmen of Lear Siegler and Pan American, gave presentations at the conference. The corporate lambs were lying down with the lions.
And so were the politicians. Drexel had had no Washington office or registered lobbyists before 1985. Then, however, Congress had begun rumbling about hostile takeovers. During the Unocal raid, Representative Timothy Wirth, the powerful Colorado Democrat who chaired the Subcommittee on Telecommunications, Consumer Protection, and Finance, introduced a bill outlawing greenmail. Drexel, opposed to the measure, hired a former White House aide and opened an office in Washington. It retained Robert Strauss, former Democratic National Committee chairman, and John Evans, a former SEC commissioner, as lobbyists. Contributions from Drexel’s political action committee rose from $20,550 in the 1984 elections to $177,800 in the 1986 elections.
At the 1986 Drexel bond conference, the once-critical Wirth was a featured speaker. Drexel executives gave $23,900 to his successful Senate campaign, and Wirth became a defender of junk bonds. His earlier attempt to prohibit greenmail went nowhere, and he didn’t reintroduce it. Drexel invited other influential poli
ticians to speak, including Senators Bill Bradley, Alan Cranston (the recipient of $41,750 in Drexel money that year), Edward Kennedy, Frank Lautenberg, and Howard Metzenbaum. Most of them seemed as dazzled by the aura of megamoney as the lowliest pension-fund manager. For good measure, Drexel executives contributed $56,750 to Senator Alfonse D’Amato of New York, then chairman of the securities subcommittee.
“The force in this country buying high-yield securities has overpowered all regulation,” Milken confidently told The Washington Post. The Milken creed on high-yield junk bonds, once an arcane topic of economic analysis, had become the gospel of the 1980s. Companies with conservative balance sheets began to feel foolish. Almost no one questioned Milken’s premises anymore.
And who could argue with the numbers? Several academics, most prominently New York University professor of finance Edward Altman, issued studies showing that data through 1985 confirmed Milken’s thesis that a portfolio of junk bonds yielded substantially higher returns with no greater risk than U.S. Treasuries. Altman became an eager proponent of Milken’s views.
During the early and mid-1980s, Milken’s highly leveraged clients seemed to show an amazing ability to stave off default, even when operating results were disappointing. In those cases, Milken simply “restructured,” piling on a new and dazzling array of high-yield securities to replace the debt that was on the verge of default. The new tiers invariably pushed payments further into the future, giving the company more time to revive, and forestalling any rise in default rates.
That Milken could sell such restructurings—many of which, to anyone who studied the numbers, appeared obviously doomed—was not merely a tribute to the pervasiveness of his myth. It was a measure of the pliability of his captive clients, especially the savings and loans and insurance companies. By mid-1986, Milken’s friend Tom Spiegel had loaded Columbia Savings and Loan with $3 billion of Drexel-generated junk; his crony Fred Carr’s First Executive had a whopping $7 billion. More astoundingly, Milken himself would sit down at the end of the day and move chunks of securities in and out of their portfolios. No one minded as long as profits kept mounting.
Milken had other captive buyers. David Solomon ran his own money management firm, Solomon Asset Management, with over $2 billion in assets, most of it from employee welfare and pension plans. He had become one of Milken’s earliest converts, and invested heavily in Milken high-yield products. Milken rewarded Solomon by making him a manager of a junk-bond mutual fund, the Finsbury Fund.
Finsbury’s purchases of Milken products generated enormous commissions for Milken’s high-yield department, some of which were owed to the Drexel salesmen who induced clients to buy into Finsbury. But Milken wanted all the commissions. So he ordered Solomon to reimburse him for the commissions he had to pay other Drexel salesmen. When Solomon refused, Milken threatened to have Solomon removed from his lucrative position as Finsbury’s manager. Solomon capitulated.
Milken and Solomon, to recoup the commissions, simply inflated the price paid by Finsbury for junk bonds, and Milken pocketed the difference. Sometimes Milken helped generate phony tax losses for Solomon’s personal trading account. Solomon evaded paying taxes on about $800,000 of income in 1985 alone. And Milken bestowed some equity from the Storer buyout on Solomon. Much of this scheme was illegal; ultimately, it was the Finsbury shareholders and U.S. taxpayers who were being cheated.
Milken hired a young salesman from First Boston, Terren Peizer, just to handle Solomon’s accounts. In contrast to many others in the office, Peizer seemed the consummate Yuppie—well-dressed, fit, vain, with a sleek condominium apartment on the beach in Santa Monica with black leather furniture and high-tech stereo equipment. Peizer had been recommended by Solomon, and he quickly earned the resentment of others in Beverly Hills as he ingratiated himself with Milken and seemed to become his “pet.” Milken installed Peizer at his left side on the trading desk; Peizer and Milken liked to give each other a “high five” when one or the other had vanquished someone on the other side of a trade.
One day Milken handed Peizer a blue-backed notebook, previously maintained by Alan Rosenthal, that kept track of the elaborate reckonings between Milken and Solomon. When Peizer asked about it, Milken told him, “Go ask Lowell. He’ll explain it.” Lowell did so, in several meetings with Peizer, in which Peizer dutifully took notes. It was Peizer’s initiation into the dark underside of the Milken empire.
With Peizer in place, the illegal arrangements continued apace. The blue book functioned much as Thurnher’s spreadsheets did in the Boesky arrangement. Lowell oversaw the operation. No one complained; the scheme seemed undetectable to regulators.
Thus, in ways large and small, legal and illegal, the ordinary discipline of a free market of arm’s-length buyers and sellers was undermined. The high-yield market’s growth was limited only by Milken’s ability to generate product—not by market discipline or independent decision-making on the part of buyers. In 1976, before Milken moved to Beverly Hills, junk-bond issues had totaled $15 billion. Now, in 1986, it was $125 billion—nearly a ninefold gain.
As for Milken’s own personal wealth, public and private estimates at the time tended to hover around the $1 billion mark, placing Milken in the rare category of self-made billionaires. Yet this was very far from the truth. Milken made $550 million from Drexel in 1986. In addition, he (and the funds he controlled in the names of family members) probably earned at least that much from the Beatrice warrants alone. Milken and other partners received a distribution of $437.4 million from Otter Creek, the Milken-created partnership that had traded so presciently in National Can stock. Beatrice was only one of dozens of transactions in which Milken and his family gained valuable warrants and other equity interests, and Otter Creek was only one of more than 500 Milken-created partnerships. While such assets shift in value and are difficult to measure in any event, a closer and still conservative estimate of Milken’s and his family’s net worth by the end of 1986 would be $3 billion. In all likelihood, Milken had made himself one of the ten richest men in America.
No wonder Milken seemed so in command at the 1986 junk-bond conference. On Thursday evening of the conference, Fred Joseph walked down the garden path leading from the Beverly Hills Hotel to the secluded Bungalow 8 with Irwin Schneiderman, the Cahill Gordon & Reindel senior partner who was Drexel’s chief legal advisor. The early April air was fragrant, yet bracing. Joseph had every reason to be in awe of Drexel’s transformation, and proud of his own contribution. The firm had rolled back government challenges. It had vanquished the establishment. That year, Drexel handled a staggering $4 trillion in transactions. The firm had revenues of $5 billion. It had pretax net income of $2 billion. Drexel had agreed to lease a new 47-story, 1.9-million-square-foot skyscraper in Manhattan’s World Trade Center complex which would be 49.9% owned by the firm, a fitting monument to its new stature. Drexel was now truly a rival to Goldman, Sachs and Morgan Stanley. At this rate, those firms would inevitably be eclipsed. The fortunes and opportunities of Wall Street had proven as fluid as Joseph predicted when he came to Drexel just 10 years before.
As Joseph and Schneiderman approached the bungalow, Donald Engel’s annual party was in full swing. Despite the selectivity of the guest list, hundreds of people were there, crowded into the bungalow’s rooms and spilling out onto the surrounding terraces. Waiters carrying champagne and cocktails threaded their way through the crowd.
That year’s guest list was practically a who’s-who of self-made multimillionaires of the 80s: Merv Adelson, Norman Alexander, Henry Kravis, George Roberts, Boone Pickens, John Kluge, Fred Carr, Marvin Davis, Barry Diller, William Farley, Harold Geneen, Rupert Murdoch, Steve Ross, Ron Perelman, Peter Grace, Sam Heyman, Carl Icahn, Ralph Ingersoll, Irwin Jacobs, William McGowan, David Mahoney, Martin Davis, John Malone, Peter Ueberroth, David Murdock, Jay and Robert Pritzker, Samuel and Mark Belzberg, Carl Lindner, Nelson Peltz, Saul Steinberg, Craig McCaw, Frank Lorenzo, Peter May, Steve Wynn, James Wolfensohn, Oscar Wyatt,
Gerald Tsai, Roger Stone, Harold Simmons, Sir James Goldsmith, Mel Simon, Henry Gluck, Ray Irani, Peter Magowan, Alan Bond, Ted Turner, Robert Maxwell, Kirk Kerkorian. Mingling with them were key Drexel corporate finance and bond salesmen, such as Siegel, Ackerman, and Dahl.
Boesky arrived, accompanied by two bodyguards. Siegel hadn’t seen Boesky since March 1985, more than a year ago. He noticed Boesky was carrying his small purse, and then he noticed how tired and drawn Boesky seemed.
There were no women at Bungalow 8 this year. Siegel had told Joseph that he wouldn’t participate in anything that involved procuring women, whether they were out-and-out prostitutes or not. Joseph himself had tried to ban the women after the 1984 conference, but Milken and Engel had opposed him. Milken, despite his own professed family values, insisted that “men like this sort of thing.” This year Joseph had put his foot down. He assured Siegel and Schneiderman that he had ordered Engel not to invite any women to the bungalow, and Engel had reluctantly complied. But he made sure there would be beautiful women at the dinner afterward at Chasen’s, even if wives also attended.
As Joseph moved through the rooms, illustrious raiders and corporate chieftains hurried to his side, praising the conference and exulting in Drexel’s ascendancy. “If somebody bombed this room, the takeover era would be over,” quipped one guest. And he was right.
Joseph looked over the crowd, and felt, for the first time, an almost palpable sense of the power that Drexel had unleashed. He turned to Schneiderman. “We can’t let this go hog-wild,” he said, struggling to be heard over the din of the party. “No one is going to let every company in America get taken over.”
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